Do “second home” and “investment property” mean the same thing? If you want to apply for a mortgage for an investment property, do you ask a lender for a second mortgage?
If you’re confused about the differences between these two types of properties and how they impact your financing options, you’re not alone.
What's in this article?
In this guide, we’ll define and explore the differences between second homes and investment properties so you can better understand your goals and needs.
What is a second home?
A second home is a property purchased in addition to a primary residence for personal use.
Second homes are typically vacation homes or retreats for the owner, used for relaxation or seasonal living. They may also be occupied as a primary residence after the owner retires.
Features of a second home
Second homes may have the following features:
- Located in beach or mountain towns or near recreation spots
- May have scenic views, pools or nearby trails
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What is an investment property?
An investment property is purchased to generate income or appreciate over time.
They may be rented to long-term tenants, used for short-term rentals such as Airbnb or Vrbo or purchased to renovate and sell at a profit.
Investment property features
Typical investment properties have the following features:
- Chosen based on the property’s potential to generate a profit
- Require management for tenant occupancy and maintenance
- Located in areas with job opportunities and high rental demand
Why is the difference between second homes and investment properties important?
Understanding the difference between second homes and investment properties is important for the following reasons:
- Mortgage lenders have specific—and frequently different—requirements for second homes and investment properties.
- The IRS classifies second homes and rental properties differently.
- Each property has different insurance needs.
- Local laws and regulations may differ for personal use versus rental properties.
The distinction between second homes and investment properties may confuse some people because second homes can be rented out on a short-term basis when not in use.
For example, if a second-home owner lives in Michigan during the summer and Florida during the winter, they may rent their property during the summer Florida months for additional income.
However, there are specific IRS rules and local laws for owner occupancy and short-term rental properties; so if you choose this route, you must consider all factors carefully.
Second homes vs investment properties: key differences
Beyond the purpose and features of these two types of properties, let’s examine the specific financial differences, tax considerations and responsibilities.
Financial commitment
- Second home: This type of property typically allows for lower down payment amounts than investment properties and requires the owner to occupy the property for at least part of the year.
- Investment property: This category of property is considered a higher risk, so these properties often require larger down payment amounts and proof of rental income potential to qualify for financing. They also generally have higher ongoing expenses for property management, maintenance and marketing.
Tax treatment
- Second home: Homeowners may be able to deduct mortgage interest and property taxes (up to a certain amount) if the second home is designated exclusively for personal use.
- Investment property: Investors typically can deduct business expenses such as repairs, depreciation and management fees.
Consult with a tax professional to determine your specific tax requirements based on property use.
Management and maintenance
- Second home: The property may need occasional maintenance or caretaking when not in use.
- Investment property: The property will require active management if rented to tenants, either by the owner or through a property management service.
Legal considerations
- Second home: Second homes for personal use generally have minimal restrictions. But if you intend to use them as a short-term rental for part of the year, you must comply with local or HOA rules.
- Investment property: Investment properties are often subject to stricter zoning laws, tenant rights regulations and rental permits. Investors should consult with a real estate attorney to ensure compliance.
How to choose the right option for you
For some buyers, purchasing a second home or investment property is straightforward.
Others may need to weigh the desire for additional income against purchasing a space solely for recreational or family use.
Let’s look at some factors which can help you determine which option is right for you.
When does a second home make sense?
- Vacation destination or seasonal living: You want to purchase a dedicated space for your family to spend summers at the beach or winters in the mountains and create years of memories.
- Future retirement home: You plan to retire in a specific area but want to purchase a home now to lock in prices or enjoy it with your family and friends until you need it as a permanent residence.
- Hobby or work retreat: You’re passionate about skiing, playing golf or fishing and want a home near your favorite activity. Or, you’re a writer, freelancer or contract worker who wants an escape for peace and quiet.
- Close to family or legacy property: You have close family that live in a different city and want to be able to visit more regularly, or you want to purchase a home that can be passed down to your heirs.
When is an investment property the better option?
- Generating passive income: You want to supplement your income by renting out a property long-term or short-term.
- Building wealth: You’re looking for a real estate asset to diversify your investment portfolio.
- Flipping for profit: You have renovation experience and want to buy, improve and sell properties for a profit.
- Preparing for retirement income: You want a steady income stream during retirement and are building a portfolio of rental properties.
- Taking advantage of tax benefits: You want to offset your taxable income by deducting repairs and property management expenses.
To help you make the right decision, consult a trusted mortgage lender like Compass Mortgage and a reputable financial advisor.
This team can help you explore your full range of options, including dual-use properties which could offer you the best of both worlds.
Apply for your second home or investment property
The experienced loan officers at Compass Mortgage are here to help you with your questions about second homes and investment properties.
Share some basic details about your finances and purchase interests so we can provide customized loan solutions tailored to your unique scenario.
Purchasing in a competitive market? Compass Mortgage has your back. With the Get Committed® program, you’ll get a fully vetted loan commitment before finding the property you hope to buy.
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